State and Local Tax (SALT) Workarounds Post-OBBB

The One Big Beautiful Bill (OBBB) introduced many changes to individual income taxation, one of which was alterations to the State and Local Tax (SALT) deduction on Schedule A. These adjustments bring new opportunities and planning challenges for business owners using Pass-Through Entity Taxation (PTET) to lower their federal and state income tax bills.  

In this article, we'll cover the details of the SALT changes under the OBBB, including new strategies to bypass SALT caps, how to handle non-conforming state planning, and out-of-state partnership considerations.  

Under the OBBB, the SALT deduction was increased to $40,000 starting in 2025. Prior to the OBBB, the Tax Cuts and Jobs Act (TCJA) capped the SALT deduction on Schedule A to $10,000 for tax years 2018 through 2025.  

However, the increased deduction does come with conditions. Individuals with a Modified Adjusted Gross Income (MAGI) over $500,000 will see the $40,000 limit begin to phase out by 30% of the excess income above the threshold. This means that a taxpayer with a $525,000 MAGI will have a capped SALT deduction of $32,500. Taxpayers with a MAGI above $600,000 will still have the $10,000 cap.  

The SALT increase isn't permanent. In fact, it's set to increase 1% each year through 2029 and revert back to $10,000 in 2030. Similarly, the MAGI phase-out threshold rises to $505,000 in 2026 and 1% thereafter.  

As a workaround to the $10,000 SALT cap, many states began allowing pass-through entities to pay their taxes at the entity level instead of the individual level. Normally, pass-through entities, like S Corporations and Partnerships, pass taxable income to shareholders and partners on Schedule K-1. Then, taxes are assessed at individual income tax rates at the federal and state levels. PTET eliminates the state taxable income passed through. Instead, it is paid at corporate tax rates.  

One of the advantages of using PTET is the ability to deduct state taxes paid on the federal return. State taxes deducted at the federal level are not subject to a cap, essentially avoiding the $10,000 limit put in place by the TCJA. However, implementing PTET can quickly become complex if you have owners residing in multiple states.  

Let's say that your business is active in Colorado. You have $100,000 of taxable income assigned to the state and make a PTET election. For the 2025 tax year, the Colorado PTET rate is the same as the individual rate at 4.40%. On your business return, you will pay $4,400. Assuming your federal taxable income is the same, the $100,000 is reduced by the $4,400 of state taxes paid, bringing the taxable income passed through to $95,600. While Colorado's tax rate is the same at the entity and individual levels, the added deduction from federal taxable income makes a difference in overall income tax paid.  

The increase in the SALT deduction isn't favorable for high-income earners, especially those with a MAGI above $600,000. Earlier versions of the OBBB looked to limit the deductibility of PTET for Specified Service Trade or Businesses (SSTBs), but the final bill ultimately did not eliminate PTET, drawing in new considerations for business owners facing a limited SALT deduction.  

One of the top reasons businesses pursue PTET is because of the federal tax savings. The ability to deduct state taxes can reduce federal taxable income by thousands of dollars, especially for taxpayers over the MAGI threshold. Even if your MAGI is below the threshold, high tax states can cause you to quickly reach the $40,000 limit, making it more beneficial to use PTET to deduct the full amount of state taxes paid.  

The Status of State PTET 

As of mid-2025, 36 states have active PTET legislation. The District of Columbia, and Maine have pending PTET legislation, while Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming have no PTET. Delaware, North Dakota, and Vermont have an owner-level personal income tax on PTE income. This list is subject to change. In fact, many states alter their PTET each year for the current tax environment.  

There's no one-size-fits-all approach when it comes to balancing PTET and SALT caps. In fact, the decision is highly individualized and based on the circumstances in that specific tax year. Nevertheless, here are five considerations when trying to balance PTET and SALT caps.  

Missed Credits 

Many credits available at the corporate and individual levels are based on income. Removing state taxable income can result in missed credits. For example, Wisconsin has a pass-through manufacturing credit that is based on taxable state income. While you can claim the full credit at the corporate level, the credit is limited at the individual level based on taxable income. Countless other states have similar credit limitations.  

When it comes to electing PTET, missed credit opportunities need to be considered. For example, a credit at the state level might be more powerful compared to a state tax deduction at the federal level. While it can be difficult to pinpoint all missed credit opportunities when multiple shareholders are involved, it is an important factor when considering entity-level credits.  

Other Schedule A Items 

While considering other Schedule A items can be impossible in entities with numerous partners, sole owners should look at the big picture. If pass-through owners have other Schedule A items, like charitable contributions or mortgage interest, it can make more sense to bypass PTET to increase the total deductions and break outside of the standard deduction.  

Let's say that your MAGI is below $500,000. You have $25,000 of eligible SALT, $15,000 of mortgage interest, and $5,000 of charitable contributions. Assuming you file jointly, your eligible itemized deductions would be $20,000 if you elect PTET. This would lead you to take the standard deduction.  

However, by paying pass-through taxes at the individual level instead of the corporate level, you are able to add the $25,000 SALT deduction to your other itemized deductions. This bumps your eligible itemized deductions up to $45,000, which is greater than the standard deduction. While you would be eligible for the full $25,000 SALT deduction if you elected PTET, it is more beneficial to bundle the state tax with your other itemized deductions.  

Double Taxation Risks  

Pass-through entities with owners in states without PTET can potentially cause double taxation risks. If the owner's resident state does not offer a PTET program or a credit for taxes paid to another state, the owner could pay tax on the income in both states. Not only can this cause owner dissent, but it can also negate any potential federal tax benefits. We'll touch more on how to avoid double taxation risks in the non-conforming state tax planning section.   

State Filing Requirements 

Each state has different PTET filing requirements, making it essential to evaluate the pros and cons on an annual basis. For example, is the PTET election mandatory for all owners or can select owners opt in? Election mechanics and owner eligibility need to be factored into your decision to pursue PTET. 

Moreover, it's also important to understand changing requirements, like tax rate increases or minimum tax amounts. It might make sense to claim PTET in one year and not the next due to a state tax increase. Similarly, if your pass-through entity sustains a loss, you may want to push the loss through your individual return instead of creating a carryforward at the entity level. To find the optimal balance between PTET and SALT, state filing requirements must be fully evaluated each year.  

Composite Payments 

One alternative to the PTET election is to make composite payments. A composite tax filing simplifies state tax filings by allowing the pass-through entity to file one return for all nonresident owners. The payment is not deductible from federal taxable income but is included as an out-of-state tax credit on the owner's resident state filing. For nonresidents, composite payments do not trigger the need to file a nonresident state return.  

Composite filings are a great option if your pass-through entity has nonresident owners, the SALT limit is not a primary concern, and the entity is looking to simplify state filings. However, if owners reside in high-tax states and are impacted by the SALT cap, there may be a greater tax benefit of making PTET elections.  

One of the main concerns with the PTET is planning for non-conforming states to avoid double taxation. Let's go through a few different non-conforming state planning strategies:  

Evaluate State Rules 

First, it's important to evaluate the state's rules. Do they offer a credit for taxes paid to another state? If so, the double taxation problem can be avoided. One example is Pennsylvania. Currently, Pennsylvania does not have any passed PTET provisions, but it does allow an out-of-state credit for S Corporation owners. When evaluating state rules, check for any credit limitations or caps. If the state caps credits, it might not be worth pursuing PTET.  

Analyze PTE Structure 

If the PTE is active in multiple states, non-conforming state planning becomes more complex. The impact of each PTET election should be considered, including the impact on owners. Pass-through entities with owners in different states may benefit from forming separate legal entities to hold assets. This strategy is only ideal if business units can easily be separated by states. However, separating business activities into different legal entities can increase your audit risk and add to your administrative filing burden.  

Calculate Net Tax Benefit 

Even in states that allow PTET, making the election doesn't necessarily result in tax savings. If there is a small or no tax benefit of making the election, you don't have to worry about non-conforming states. For example, if your business has a loss for the year, no state taxes will be paid, meaning it doesn't make sense to elect PTET.  

The main issue for out-of-state partnerships is the tax treatment for resident and nonresident partners. PTET elections do not benefit nonresident partners unless their resident state has a credit. Similarly, partnerships with ownership in other partnerships face complex deduction limitations. While some states, like New Jersey, allow for tiered partnership credits, others have no current legislation in place.  

Out-of-state partnerships should engage in similar steps as non-conforming states, including evaluating state rules, analyzing the PTE structure, and calculating the net tax benefit. Out-of-state partnerships will also need to consider broader tax implications, like uneven distributions to cover taxes paid and partnership agreement limitations.  

Making the PTET election isn't just a workaround for the SALT cap for high earners; it's an opportunity to reduce federal taxable income. Even though the SALT cap has increased to $40,000, the PTET election can be more realistic for pass-through entities with multiple owners or high income.  

Maximizing your SALT deduction, whether through PTET or on Schedule A, takes careful consideration of your specific situation. Reach out to one of our expert CPA's today to evaluate your tax plan to find the best solution for your state and local taxes.